BEC (B3-T1): Questions on Financial Modeling Projection

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  • #168861
    SoCalCPA
    Member

    I think I have a good understanding of the finance side of BEC, but I don’t understand how some of the answers are calculated. If you could take a stab and answer them, much appreciated!

    Q1) Company A is considering replacing an existing machine with a new machine. The new machine = $160K in cash, shipping cost is $30K, and the investment in the new machine will require an immediate increase in working capital of $35K. PV of $1 at 10% is .621 for 5 periods. The overall discounted CF impact of Company A’s working capital investment for the new production machine would be:

    A)

    (35,000) + 21,735 = -13,265

    Me: I understand that the new machine will require WC of $35K, but where is 21,735 coming from? I see that it is $35,000 * .621 to get 21,735, but where in that question do we see that it is there will be cash inflow?

    —-

    Q2) For the next 2 years, a lease is estimated to have an operating net CF of $7,500 per annum, before adjusting for $5K per annum tax basis lease amortization, and a 40% tax rate. The PV of an ordinary annuity for $1 per year at 10% for 2 years is $1.74. What is the lease’s after tax PV using a 10% discount factor?

    A) (7,500 * 1.74) – (7500-5000)(40%)(1.74) = $11,310

    Me: What I did –>

    7,500 * 0.6 = $4,500 [=Net income]

    5000 * .4 = 2,000 [tax shield=

    Total = $6,500

    $6,500 * 1.74 = same answer

    Did I do it correctly to get the same answer, or was it coincidence? Thanks again!

    B - (4/2012)
    A - (5/2012)
    R - (1/2012) Done!
    F - (10/2011) Done!

Viewing 2 replies - 1 through 2 (of 2 total)
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  • #336614
    Excited_CPA
    Member

    Hi SoCalCPA,

    For Question #1, we have the initial WC of 35k (cash outflow). But at the end of the 5 years (when the machine is finished), you get that initial WC of 35k (cash inflow) back. That's why they're adding it in.

    For Question #2, I think I would have done it your way too. I'm trying to understand why they didn't multiply the tax rate in their calculation of the $7,500 first. I think if you multiply everything out and move numbers around, it'll be the same calculation though.

    Hope that helps!

    BEC 04/14/12 87
    FAR 08/28/12 88
    AUD 10/06/12 94
    REG 02/09/13 91

    #336615
    SoCalCPA
    Member

    Hey! Thanks for answering. Haha I feel pretty dumb about the 1st one now that you explain it… and as for the 2nd one, yes I do not understand the way Becker does it. Oh wells. Thanks a lot for your help! Good luck on your test!

    B - (4/2012)
    A - (5/2012)
    R - (1/2012) Done!
    F - (10/2011) Done!

Viewing 2 replies - 1 through 2 (of 2 total)
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